Battle of the hedge fund managers in China

November 13, 2016

Ray Dalio: Bridgewater founder

Ray Dalio is one of the world’s great investors. He is also a self-confessed misfit. I had lunch with him in the 1990s, when he was on a rare visit to Australia – represented at the time by Sheridan Lee and Tony Tuohey. What he said then resonates now.

The founder and CIO of Bridgewater Associates, the largest hedge fund manager in the world by some measures – US$147 billion – had a lonely childhood, he said at that lunch. He got into investing in his early teens thanks to a stockbroker uncle who introduced him to the stockmarket. A 50-plus-year love affair has ensued.

A contrarian value manager by nature, Dalio came up with what could be regarded as the world’s first “outcome-oriented” strategy: the All Weather fund. At least it was the first to be widely marketed and set his company apart from other mainstream managers. Now, he is focused on growth.

Bridgewater gained approval early this year to set up a wholly owned investment business in China – the first US hedge fund manager to get such approval – and has commenced trading fixed interest securities via the China Interbank Bond Market (CIBM), using the All Weather fund as its product structure.

According to Shanghai-based research firm Z-Ben Advisors, there has been only a “trickle” of foreign managers approved to participate in the CIBM since its doors were opened to the world this year. Last week, Allianz Global Investors and Aberdeen Asset Management joined the select few.

Bridgewater’s involvement, though, has prompted a growing queue, Z-Ben says in a report last week. “The move by Dalio & Co begs the question: what do they know that others, such as Kyle Bass, do not,” Z-Ben says.

Kyle Bass is another, less well-known, hedge fund manager who is in charge of the much smaller Hayman Capital, based in Dallas Texas. He rose to fame after making prescient bets against the US sub-prime mortgage market, and has been similarly pessimistic about the Chinese economy in general and Chinese banking system in particular. Since taking his position publically in 2015, so far, he has been wrong.

The devaluation of the RMB in the past couple of years has been gradual and controlled. With the election of Donald Trump as president of the US, who may declare China a “currency manipulator” and instigate a trade war, the investment world may now witness a battle of views between Dalio, the unlikely China bull, and Bass, the bear.

The 47-year-old Bass loves geopolitics. In 2010 he testified before the US Financial Crisis Inquiry Commission. He said: “I believe that there is a role for leverage and for aggressive risk taking in the economy, but that role should be played by firms that are open and susceptible to the risk of insolvency and failure.

“Capitalism requires failure and bankruptcy as a consequence in order to guide behaviour. As the old adage goes: ‘Capitalism without bankruptcy is like Christianity without hell.’ If we cannot allow a firm to go bankrupt, then we should regulate its activities so that it cannot engage in the sort of risky transactions that put it as risk of bankruptcy.

“To be clear, we should not prevent all firms from taking on leverage or engaging in risky behaviour; we must ensure that they are not allowed to become Too Big To Fail.”

The 67-year-old Dalio, based in more hedge-fund friendly Connecticut, also predicted the financial crisis based on the sub-prime activity of 2007-2008.

Dalio pioneered the separation of alpha and beta, launching the All Weather fund in 1996. Using both stocks and bonds, Bridgewater, despite its owner’s love of stocks, became the world’s best-performing bond manager by 2000, at the height of the tech boom.

He is not really very keen on the Chinese outlook either, due to the build up in credit. But he believes the Chinese authorities have the ability to manage a transition to a more sustainable economic environment.

Dalio, the value investor, said way back in the 1990s, that the crucial aspect about his style was to be able to envision where the value in a security could be unlocked. We don’t know his precise thoughts on China, but it appears he has backed market-turning reform as a likely outcome.

He has started a business in a country where not many of his countrymen have, as yet, been prepared or able to go.